insights-property-rent

UK COMMERCIAL PROPERTY GOES ON REACHING FOR THE SKY

Despite UK commercial property yields being at cyclical lows, they still offer an attractive premium over bond yields. We see strong rental growth in 2016 helping to drive capital values, while property income remains relatively attractive.

UK commercial property has risen from the ashes of the global financial crisis to deliver several years of strong growth. For the second year in a row it has won a place in our annual Investment Outlook, but this time the investment case rests on rising rents.

We are pleased to report that 2015 was another fine year for returns as yields continued to fall, reflecting rising capital values. But for the first time in recent history, we won’t be looking for significantly lower yields in the overall UK commercial property market, since yields are now approaching levels usually associated with a peak in the property cycle.

CONTINUED ECONOMIC GROWTH SHOULD SUPPORT BUSINESS CONFIDENCE AND LEAD TO GROWTH IN COMMERCIAL RENTS

 

We expect the UK economy to continue growing steadily in 2016, which should support business confidence and lead to growth in rents. We see rents playing catch-up after the steep falls of 2008-10, especially in the office market, though the retail sector remains under pressure due to the growth of online shopping and an extremely competitive environment (think of the supermarket price wars).

Both the actual changes in rents in the last year and rental expectations suggest that rents should grow strongly in the next year. The healthy performance of UK real estate investment trusts (or REITs, highlighted in last year’s Outlook) in 2015 is further evidence that rental growth could surprise on the upside, since REIT prices have historically depended heavily on the outlook for expected rents.

We don’t see a significant risk from any of the factors that would normally turn the property market sour: oversupply, overborrowing, rising interest rates or widespread occupier defaults. While there is more available property supply outside of the South East, we don’t see it outstripping demand. Borrowers don’t look overstretched, and we believe interest-rate rises will be slow and modest. There may be some defaults as business models change, especially in retail, but on the whole the economic outlook is benign.

 

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IMPORTANT INFORMATION

Issued by Adam & Company Investment Management Limited, which is authorised and regulated by the Financial Conduct Authority. Adam & Company Investment Management Limited is registered in Scotland Number 102144. Financial Services Firm Reference Number 141831. Registered Office: 25 St Andrew Square, Edinburgh EH2 1AF.

The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance should not be taken as a guide to future performance.